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    Question

    From the following details, calculate interest coverage ratio:

    Net Profit after tax Rs. 60,000

    Long-term debt of Rs.1,000,000 at 10% interest rate

    Tax rate 40% 

    A 1.0 Correct Answer Incorrect Answer
    B 1.5 Correct Answer Incorrect Answer
    C 1.67 Correct Answer Incorrect Answer
    D 2.0 Correct Answer Incorrect Answer
    E Cannot be determined Correct Answer Incorrect Answer

    Solution

    It is a ratio which deals with the servicing of interest on loan. It is a measure of security of interest payable on long-term debts Net profit before tax = 60,000/(1-0.4) = 100,000 Annual interest on the debt = 1,000,000 x 10% =100,000 Net profit before interest and tax = 100,000+100,000= 200,000 Interest Coverage Ratio = Net profit before interest and tax / Interest on long-term debt =200,000/100,000=2 

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